Do Populist Governments Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are hawking American currency along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 midterm elections in a country long used to saving in the US dollar.

“The best time to buy is now,” states one arbolito, refusing to provide her name. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Like her, economic experts from all backgrounds expect a depreciation of the national currency once the election concludes. President Javier Milei has imposed a limit on the peso to tame triple-digit price increases and now it is overvalued and reserves are exhausted, leaving the national economy stagnant as buyers opt for cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has frequently been racked by debt defaults and economic crises and the electorate have been receptive over the years to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, vowing muscular measures to reclaim command of the economy from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his ally in the United States, and by the UK politician, who presents himself as a beer-drinking champion of the common man even though he is a privately educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and severe public spending cuts – had won plaudits from international lenders for helping to control price rises under control. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a dragon to be slain, no matter the cost.

However financial markets started to doubt in Milei’s radical project lately after a shaky result in provincial elections and a series of graft allegations. Only large-scale financial intervention by the US has averted what seemed destined to be a full-blown monetary collapse.

Contradictions

The vote for Brexit several years ago arguably had some of the same logic, and its figurehead, Boris Johnson, swept away doubts regarding fiscal impacts with a bullish determination to implement the “will of the people” despite the establishment’s horror.

Farage to date outlined limited plans in writing except for a call for large-scale removals, that he later appeared to revise on the hoof. He aims to rein in the Bank of England, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies seem in flux: concerned about being accused of planning a Liz Truss-style splurge, he recently abandoned a pledge for large tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.

Labour aims this stance will allow it to portray Farage as planning to reintroduce austerity – a point Rachel Reeves has emphasized often, contrasting it with her approach of increasing government spending.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, as it stands. “Reform are bankrolled by very wealthy people calling for tax cuts and reduced rules, but also emphasizing the complaints of working people and the loss in manufacturing employment,” he says. “There’s a tension here between wealthy supporters seeking radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

In truth, research suggests neither left nor right populists tend to fare well when confronting real-world challenges (although every populist leader promises something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, after 15 years, GDP per capita tends to be a tenth less in countries run by populist rulers compared to similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” argue the researchers.

Another intriguing finding from the study, however, is despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus four for their more moderate equivalents.

In other words, it remains uncertain whether even if their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.